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Convertible bonds are corporate bonds which pay the holder regular coupons and may be converted into the underlying shares at the holder's discretion. Here we focus on their exposure to the credit of the issuer. At low equity prices, when the equity optionality is worth little, the convertible is essentially a pure bond and it is clearly correct to price (i.e. discount cash flows) with the full credit spread of the issuer. However, it is generally held that a company's ability to issue stock is not strongly influenced by its credit rating. Accordingly, the value contributed to the bond by its conversion rights should not be subject to the same risky discounting as the fixed payments.

Tullett & Tokyo Liberty plans to expand its recently launched credit derivatives brokerage desk in Singapore in the coming months, said John Rabey, manager of the Asia-Pacific credit derivatives desk. The firm will likely double headcount on the desk to six if volumes continue to grow. Tullett brokers protection on Asian credits, including Japanese and Australian names, from the Singapore desk. Credit default swap trading makes up 99% of the desk's business, he added.

Life imitating art...A firm that produces fake money for American film studios has been ordered to hand over its phoney cash after people successfully spent it. The U.S. Secret Service, which enforces anti-forgery laws, ordered Independent Studio Services to stop printing the notes and get back all the ones it had produced so that they could be destroyed. The move comes after some of the cash got into the hands of the general public after US$1 billion was blown up during a film shoot in Las Vegas.

Conning Assert Management, a money management firm in Hartford, Conn., has been dipping in to stable, non-telco credits in recent weeks in the new issue market. Among the trades, the firm applied for $50 million and got $20 million of Alcoa 6.5% of '11 ( A1/A+). Karen Kelleher, senior portfolio manager, says the 110 basis points over treasuries price is quite wide for such a stable company, which would have traded at 60-80 over 2 or 3 years ago. She believes spreads will narrow, and cites the good fundamentals for the aluminum industry.

Mitchell Capital Management swapped out of some treasuries two weeks ago by adding agencies and corporate bonds. The firm's treasuries allocation was cut by 8%, because government bonds have been bid up too much in value, says Ken Green, portfolio manager in Kansas City, Mo. However, he is comfortable with his current treasury allocation and does not plan to decrease it further.

Westwood Capital Management, a Dallas-based money manager, has been buying longer maturity off-the-run U.S. treasuries as yields climbed over 6% late last month. Portfolio manager Mark Freeman says he increased his Treasury allocation by 2% in the move. Freeman, who manages $700 million in taxable fixed income, may look to make further increases to his position in off-the-runs maturing in '23 and '16 if the economy appears to be stabilizing, indicating that the Federal Reserve has come close to the end of its easing cycle. He says the expected modest, rather than drastic, drop-off in consumer spending rates would be one important sign of such stabilization. He would finance the move by using new cash and selling intermediate-term treasuries.

Brian Walter, a high-yield trader, has left Lehman Brothers to join UBS Warburg's high-yield desk, reporting to Rob Heffes, himself a Lehman alum. Heffes says he hired Walter because he proved his skill during their earlier association at Lehman, as well as to fill a void created when Rich Sullivan went to J.P. Morgan Securities earlier this year. Heffes says he may consider further hires to meet his desk's increased demand as the high-yield market grows.

Moody's Investors Service downgraded the ratings for WKI Holding Company (World Kitchen) to Caa1 from B2 as the credit continues to actively trade in the secondary market. Approximately $617 million in senior secured credit facilities are affected. Moody's lowered the rating due to uncertainty of the company's restructuring plan. "They're closing down U.S. plants and trying to outsource manufacturing by going overseas. It's a big undertaking," said Nancy O'Connor, v.p. and senior analyst. "After they bought and merged EKCO and General Housewares, they must take the next step, which is closing plants to reduce overhead. It's uncertain whether they'll have additional losses." WKI, based in Elmira, N.Y., is a manufacturer and marketer of household products.

Tenneco Automotive's bank debt traded up to 85 from 77-80 last week on a more active distressed market and an improved sector. Approximately $5-10 million changed hands. Dealers reported that the automotive sector is stronger and that Tenneco's levels are up 15 points from where they bottomed out when the automotive sector crashed late last year. The Lake Forest, Ill.-based company manufactures shocks and struts as well as exhaust systems.

UBS Warburg, Morgan Stanley and Bank of New York held a bank meeting last Thursday for a $150 million senior secured revolver for Key3Media Group. The Los-Angeles based producer of technology tradeshows and conferences is refinancing debt via a proposed underwritten public offering that will wipe out $300 million of bank loans and $84 million of zero-coupon debentures. The three banks are also the lead underwriters of the note offering. Officials at the company did not return calls by press time.

No merger spelled lower levels for Lucent Technology, following an announcement late last week that it would not be merging with France-based Alcatel. Levels fell slightly to the 91 1/2 range. Dealers noted there continued to be strong supply. Lucent, based in Murray Hill, N.J., is one of the top manufacturers of telecom equipment and software. Calls to Lucent were referred to a spokesman, who did not return them.